Banks 'bluffing' on NZ lending threats: former PM

Former New Zealand prime minister Bill English says threats by Australian banks to reduce lending in New Zealand if its central bank demands higher capital levels are a “bluff” given the returns they make across the Tasman.

However, Mr English also raised concerns about the Reserve Bank of New Zealand's plan to ramp up bank equity to protect its economy in a crisis, suggesting this could create moral hazard by dulling major banks’ management of risk.

He also revealed the extent of New Zealand's displeasure with the Australian government during the global financial crisis when Australia announced it would guarantee bank deposits.

This had turned the banks into a quasi “government department", Mr English told the stockbrokers conference on Thursday. New Zealand considers the risks of failure should sit with bank investors, including depositors, rather than governments, he said.

Bill English, former prime minister of New Zealand: "It's been an uphill battle since the day Wayne Swan – without telling the NZ government – issued his guarantee." Photo: Pat Scala

But Mr English said the moves were not large enough to force a reduction in lending. “[Threats] to withdraw capital is, to a large extent, bluff. Australian shareholders and Australian banks do very well out of New Zealand. They generate good returns. I think they will stick around,” he said.

Over the first half of the financial year, all of the banks reported robust deposit and mortgage growth in New Zealand, underlying profit growth of 4 per cent, and extremely low impairment charges – a stronger performance than in the Australian market.

Don’t believe what they say – watch what they do.

— Bill English on the prospects of Australian banks pulling out of New Zealand

“You make a choice – you either put up with a system and put your capital at risk, or you take it away. So far, for all the bluster over the last 15 years, no Australian bank has taken its capital away. What does that tell me? What should it tell you? Don’t believe what they say – watch what they do,” he said.

Mr English's appearance at the Stockbrokers and Financial Advisers conference in Sydney also shone a light on emerging pressure points between Australia and New Zealand, as he described the “irritation factor” when a "small sister tries to write its own rules".

The NZ government would never tolerate the Australian Prudential Regulation Authority being the sole regulator of its banks, given this could result in NZ losing control of managing a banking crisis.

"I don’t think there is any doubt on what the Australia preference is, which is we use the Australian regulators and don’t have a regulatory structure in New Zealand," he said. “That means you can make decisions that could wipe out our sovereign balance sheet. We are not going to have that, and never will – that is never going to happen.”

“It's been an uphill battle since the day Wayne Swan, without telling the NZ government, issued his guarantee," Mr English said.

“All you can do is gradually push that boundary back from the assumption, which is deep-seated in Australia, that the sovereign guarantees the banking system. That makes [banks] a kind of government department, not serious businesses because they are not actually managing their risk.”

Mr English, who was succeeded as prime minister by Jacinda Ardern in 2017, said his government, as part of its process for formalising how to deal with bank failures, considered requiring the banks to tell their depositors they might be forced to take a haircut in a crisis. While the details were not finalised, the proposed policy "gave them pause for thought they might have to” put losses on to investors and should not rely on the NZ government to prop them up.

'Satanic cult thinking'

The contrast with attitudes in Australia, where there is an expectation of government support, had the bosses of the NZ operations thinking “how we explain that to head office in Australia, where they think this is some kind of weird, satanic cult thinking”.

Ms Ardern's government has backed away from this policy, but Mr English said he prefers it to the RBNZ's current capital plans under governor Adrian Orr.

While raising capital levels heavily reduces the likelihood the banks will struggle in a crisis, "on the other hand, it means banks will stop thinking about risk management altogether", he said. "And I think in the long run, that is dangerous.

“It is better to have the balance a bit the other way, where people understand the risk the event could happen on their watch, and they pay attention to what risks they are taking – and the market prices those so the right people pay the bill for the risk.”

Mr English served as finance minster and deputy prime minister under prime minister John Key, who joined the board of ANZ in 2018. Mr English succeeded Mr Key as PM in 2016.

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James Eyers writes on banking, fintech and technology. Based in our Sydney newsroom, James is a former Legal Affairs and Capital editor for the Financial Review Connect with James on Twitter. Email James at jeyers@afr.com.au